Nelco Inc. has decided in favour of a capital structuring that involves increasing its existing $80 million in debt to $125 million. The interest rate on debt is 9% and is not expected to change. The firm currently has 10 million shares outstanding and the price per share is $45. If the restructuring is expected to increase the ROE, what is the minimum level of EBIT that Nelco’s management must be expecting. Ignore taxes in your answer.
Q: Uchimura Corporation has two divisions: the AFE Division and the GBI Division. The corporation's net…
A: Net operating Income = $42,000 Segment margin AFE = $15,700 GBI = $175,400 Fixed Cost not traceable…
Q: nancial statement analysis provides information to internal users to improve: O financial statements…
A: Financial statement analysis means analysing the financial statement of a company for decision…
Q: Summarize total costs to account For, calculate cost per equivalent unit for direct materials and…
A: The equivalent units are calculated on the basis of the percentage of the work completed during the…
Q: ROE ROA ROE = Papa John's International Inc. USD Millions 2015 Return on Capital shareholders have…
A: DuPont analysis is a financial ratio analysis method that breaks down return on equity (ROE) into…
Q: The following merchandise transactions occurred in December. Both companies use a perpetual…
A: Journal entries are the primary reporting of the business transactions in the books of accounts.…
Q: Craftmore Machining reports the following budgeted overhead cost and related data for this year.…
A: Activity based costing means where the product is valued on the basis of actual direct material ,…
Q: Need help with questions: Determine why it is important to have auditing standards. Specifically,…
A: The importance of auditing standardsAuditing standards are the backbone of any auditing process.…
Q: If The Lego Movie set could be manufactured in the United States and Days on Hand reduced to 5 days…
A: Reducing the number of production days for a movie can result in substantial cost savings. Fewer…
Q: Martinez Company's relevant range of production is 7.500 units to 12.500 units. When it produces and…
A: MANUFACTURING OH Manufacturing overhead is All the overhead that is incurred in manufacturing of an…
Q: On the day Federer Ltd redeemed its $1,000,000 face value bonds at 98, their carrying value was…
A: Redemption of bond payable refers to the process by which a company or issuer repurchases and…
Q: Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost…
A: Plantwide Overhead Rate :— It is the rate used to allocate manufacturing overhead costs to cost…
Q: a. On April 1, the start of the loan period, the cash balance will be $18,800. Accounts receivable…
A: A cash budget is a budget that provides information about the company's projected cash inflows and…
Q: Prepare the journal entries by Barnwell to record all events related to the bonds through January…
A: As you have asked multiple sub-parts we can solve only first three sub-parts for you please repost…
Q: Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley…
A: Bonds payable are the long-term liabilities which help organizations to raise funds for the long…
Q: The selected accounts from the Ayayai Corp's accounting records are presented below for the year…
A: The income statement is one of the important financial statements of the business. It records the…
Q: On September 30, 2014. Sky Company issued 8% bonds with a par value of A$500,000 due in 20 years.…
A: The bonds are the long-term debt instrument issued by the corporation to fund long-term needs. Bonds…
Q: Which of the following is not true regarding depreciation? Oa. Depreciation allocates the cost of a…
A: Depreciation is an accounting method used to allocate the cost of a tangible fixed asset over its…
Q: Calculate the federal income tax liability, marginal tax rate, and average tax rate for each of the…
A: Income tax is based on income. Suppose a person has salary income, capital gain income, house rent…
Q: What type of company or environment would use plantwide, departmental and activity-based costing
A: The activity-based costing can be defined as a kind of method used to find the production cost. The…
Q: Stacy Inc. makes and sells phones. The price of the standard model is $280 and its variable expenses…
A: Sales per unit Standard= $280 Deluxe = $460 Variable Cost per unit standard = $150 Deluxe = $250…
Q: Retained earnings, December 31, 2021 Cost of buildings purchased during 2022 Net loss for the year…
A: The retained earnings are the accumulated profits available for the shareholders. The retained…
Q: Candy Canes Incorporated spends $271,000 to buy sugar and peppermint in April. It produces its candy…
A: Income represents the earnings or revenue generated over a period, while cash flows track the actual…
Q: On January 1, 2021, Casey Corporation exchanged $3,209,000 cash for 100 percent of the outstanding…
A: A balance sheet is a particular kind of financial statement that is used in business in order to…
Q: The following costs result from the production and sale of 4,700 drum sets manufactured by Tight…
A: Variable cost is the cost that changes with change in the activity of cost driver. Variable cost per…
Q: The Polaris Company uses a job-order costing system. The following transactions occurred in October:…
A: The journal entries are prepared to keep the record of day-to-day transactions of the business. A…
Q: On July 1, 20Y1, Danzer Industries Inc. issued $50,000,000 of 10-year, 8% bonds at a market…
A: The bonds can be issued at a discount or premium, the discount or premium on the bonds is amortized.…
Q: undeveloped land and land with a commercial building on it would qualify as "like-kind" property…
A: Section 1031 allows for the deferral of capital gains taxes on the exchange of certain types of…
Q: 1. The following is a list (in alphabetical order) of the adjusted account balances of Consultants,…
A: 1. A trial balance is a statement that contains ledger balances. The sum of debit and credit of the…
Q: You have just been hired as a new management trainee by Earrings Unlimited, a distributor of…
A: Budgeting is the process of estimating future operations based on past performance. % are estimated…
Q: What are the implications and accounting treatment for a company transitioning from LIFO (Last-In,…
A: In the business and accounting landscape, inventory valuation is a critical process that involves…
Q: Assume (1) estimated manufacturing overhead for the coming period of $314,000, (2) actual…
A: PREDETERMINED OVERHEAD RATEPredetermined rate means the indirect cost rate.Predetermined overhead…
Q: Suppose that a firm has the option to make or buy a part. Its annual requirement is 19,000 units. A…
A: Variable costs are costs that vary with the change in the level of output whereas fixed costs are…
Q: Rusty Company is considering developing a new product. The company has gathered the following…
A: The markup value is the amount which is added to the cost inorder to set the selling price and to…
Q: A company has the following balance sheet information: cash of $127,536, current assets of $350,647,…
A: Ratio analysis helps to analyze the financial statements of the company. Management can make…
Q: Accounting information about the planning, organizing, and running of a company is prepared for:…
A: Internal and external users of financial statements are two distinct groups of individuals or…
Q: Suni, age 21, is a full-time student at the University and is a dependent of her parents. She had…
A: Taxable income for a dependent is the amount of money a person who is considered a dependent for tax…
Q: Havana Hats makes the world's best hats. Information for the last eight months follows: Number of…
A: Contribution margin income statement emphasis on the behaviour of the cost and determines two main…
Q: Fill in the blanks in the following separate income statements a through e. Sales Cost of goods sold…
A: Lets understand the basics.Gross profit means the profit earned by selling the goods without…
Q: Hoover Corp., a wholesaler of music equipment, issued $32,700,000 of 20-year, 6% callable bonds on…
A: A callable bond is enables its issuer to redeem it or "call" it ahead of the bond's scheduled…
Q: Preparing and Analyzing Closing Entries Sparrow Company had the following adjusted trial balance at…
A: Preparation of closing entries is a method the business entity uses to close its temporary accounts…
Q: Transactions by Amna Inc. for the month of April 2021: 1. Received $98,000 cash and issued shares to…
A: Accounting cycle starts with recording of business transactions in form of journal entries. Under…
Q: Patents ($75,000 cost less $7,500 amortization) Franchises ($53,400 cost less $21,360 amortization)…
A: The straight-line method of depreciation allocates the cost of the assets equally over the useful…
Q: The company uses a job-order costing system in which overhead is applied to jobs on the basis of…
A: Journal entry : Method of recording financial transactions in the book of original entry by debiting…
Q: reduction and Journal Enthes AccuBlade Castings Inc. casts blades for turbine engines. Within the…
A: Journal entries are prepared to record the financial and non financial transactions of the business…
Q: Calculate cost of goods sold using the following information Inventory type Raw Materials…
A: The cost of goods sold includes the cost of goods that are sold during the period. The ending…
Q: Whispering Corp. enters into a contract with a customer to build an apartment building for…
A: A construction contract is a binding agreement between two parties, often a customer or property…
Q: Expert Q&AMy solutions Notifications Student question Time Left : 01:54:13 Effects of Errors on…
A: A liability is an entity's future debt to customers, suppliers, or other firms. This implies that…
Q: E2-19 Green Wave Company plans to own and operate a storage rental facility. For the first month of…
A: Journal entries are the foremost reporting of business transactions in the books. These are posted…
Q: Cobb Company currently produces and sells 9,000 units annually of a product that has a variable cost…
A: Total Sales = Profit + Fixed cost +total variable costTotal variable cost = variable cost per unit ×…
Q: The following data from the just completed year are taken from the accounting records of Mason…
A: COGS comprises expenditures directly related to the manufacturing process, such as raw materials,…
Question 3
Nelco Inc. has decided in favour of a capital structuring that involves
increasing its existing $80 million in debt to $125 million. The interest
rate on debt is 9% and is not expected to change. The firm currently has 10
million shares outstanding and the price per share is $45. If the
restructuring is expected to increase the
EBIT that Nelco’s management must be expecting. Ignore taxes in your answer.
Step by step
Solved in 3 steps
- Capital Structure Analysis Pettit Printing Company has a total market value of 100 million, consisting of 1 million shares selling for 50 per share and 50 million of 10% perpetual bonds now selling at par. The companys EBIT is 13.24 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change. The firm pays out all earnings as dividends; hence, its stock is a zero-growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firms WACC and total corporate value under each capital structure?Question 6 "Axon Industries needs to raise $250,000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 15%, although Axon's managers believe that 8.5% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11%.What is the cost (in USDs) to current shareholders of financing the project out of equity? Note: Express your answers in strictly numerical terms. For example, if the answer is $500Horizon Corporation has decided to a capital restructuring. This process of restructuring involves increasing its existing $80 million in debt to $125 million. However, the interest rate on the debt is 9 percent and it is not expected to change. The firm currently has 10 million shares outstanding, and the price per share is $60. If the restructuring is expected to increasethe return on equity (ROE), what is the minimum level for EBIT that Horizon’s management must be expecting? Ignore taxes in your answer.
- Question 5 The Joe Company has experienced a slow (3 percent per year) but steady increase in earnings per share. The firm has consistently paid out an average of 75 percent of each year’s earnings as dividends. The stock market evaluates Joe primarily on the basis of its dividend pay-out because growth prospects are moderate. Joe’s management presents a proposal to the board of directors that would require the investment of RM50 million to build a new plant in the rapidly expanding Ipoh market. The expected annual return on the investment in this plant is estimated to be in excess of 30 percent, more than twice the current company average. To finance this investment, a number of alternatives are being considered. They include the following: a) Finance the expansion with debt. b) Finance the expansion with 50 percent externally generated equity and 50 percent internally generated equity. This alternative would necessitate a dividend cut for this year only. c) Finance the expansion with…Q.An all-equity company is considering borrowing $10,000,000 and using the borrowed funds to repurchase shares. The company's cost of equity is 9%. EBIT is expected to be $3,600,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. If the company proceeds with the capital restructing, what will be the value of the company according to M&M Proposition I without taxes?Q.An unlevered company that has a current value of $1,600,000 is considering borrowing $700,000 and using the borrowed funds to repurchase shares. The company can borrow at 5% and has a cost of equity of 13%. EBIT is expected to remain the same every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. What is the company's EBIT according to M&M Proposition I without taxes?
- 5 1. The JJ. Binks Company is an all equity firm. It expects perpetual earnings before interest and taxes (EBIT) of $120 million per year. Its equity required return is 15%. The firm is subject to a 25% tax rate. a. Calculate the value of the un-levered JJ. Binks? b. The company considers leveraging as a way to increase the firm value. With leveraging it will face bankruptcy possibility at a cost of $60 million in exactly one year (Assume a 15% discount rate). The company plans to issue debt and buy back shares with the proceeds. It considers the following debt issuance: $50m, $75m , $100m, 125m, 150m and 175m. These debt levels will introduce an increasing probability financial distress of 5%, 10%, 20%, 30%, 50% and 70%, respectively. Evaluate the JJ. Binks optimal capital structure.QUESTION 2 Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Calculate the number of shares that can be issued irrespectively under the current and proposed capital structures.Question 4Brightland Inc. has a market value equal to its book value. Currently, the firm has excess cash of $1,500, other assets of $5,800, and equity valued at $5,000. The firm has 250 shares of stock outstanding and net income of $500. What will the new earnings per share be if the firm uses 30 percent of its excess cash to complete a stock repurchase? Question 5In the absence of market imperfections and taxes, stock repurchases are same as cash dividends. How does this change in real world circumstances and what effect does a stock repurchase announcement have on stock price?
- Question 5 - Show your workings. KLM Berhad currently has RM200,000 debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are RM100,000, and it is a zero-growth company. The company's cost of equity is 10 percent, and its tax rate is 27%. The company has 10,000 shares of common stock outstanding. The dividend payout ratio is 100%. KLM Berhad is considering recalling the 6 percent debt by issuing RM400,000 new 7% debt. The new funds would be used to replace the old debt and to repurchase stock at the existing price. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on equity to increase to 12%. If this plan is carried out, what would be the company's new stock price?QUESTION 2 Pipe Ltd is a totally equity-financed company with a value of R200 000,00. Management wants to introduce a 30% debt in the capital structure without altering the total amount of financing required (R200 000,00). Pipe Ltd’s shares are trading at R10,00 per share and the company pays all its earnings as dividends. The details of the new 30% debt ratio are listed below: Debt ratio 30% EBIT R100 000 Interest rate 11.5% Required return 14% Tax rate 28% Based on earnings per share, advise management whether they must introduce the 30% debt or retain the totally equity financed capital structure.Q.An all-equity company that has a current value $300,000 is considering borrowing $60,000 and using the borrowed funds to repurchase shares. The company can borrow at 5%. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied except the corporate tax rate is 35%, and investors are subject to an 18% tax rate on equity income and a 25% tax rate on debt income. If the company proceeds with the capital restructuring, what will be the value of the company according to M&M Proposition I with personal and corporate taxes?